Special Topics in Economics Econ 491 Chapter 10

Special Topics in Economics Econ. 491 Chapter 10: Stock Exchange Market

I. Stock Market Overview § Stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. § Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. § A stock is represented by a stock certificate. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. But now is easier.

What is the difference between the stock and bond? (1) Bond Market - Corporations and Gov’s are able to borrow to finance their activities. - Bond is a dept security that promises to make payments on a period basis at a specific period of time. (2) Stock Exchange Market - Claims on the earnings of corporations are traded - Stock is a share of ownership in a corporation.

II. Types of Stocks § There are two main types of stocks: common stock and preferred stock. § Common stock is common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. § Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company. ) § With preferred shares, investors are usually guaranteed a fixed dividend forever.

III. Traded Stocks § A primary market is a financial market (stock market) in which new issues of a security are sold to initial buyers. § A secondary market is a financial market (stock market) in which securities that have been previously issued are resold. § Secondary markets serve two functions: A. They make financial instruments more liquid( cash generated from flows of money through more sellers & buyers). B. They determine the price of the security (through supply and demand).

Thus; § There are many stock exchanges located in just about every country around the world. § Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. § The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. § A stock market is nothing more than a supersophisticated farmers' market linking buyers and sellers.

IV. Price of Stock § Stock prices change every day as a result of market forces. § Share prices change because of supply and demand. § Understanding supply and demand is easy. § But what makes people like a particular stock and dislike another stock. § This comes down to figuring out what news is positive for a company and what news is negative.

§ So mainly, at the most fundamental level, supply and demand in the market determines stock price. § Also what affects the stock price is company’s earning which affects investors' valuation of a company, § However, there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices.

IIV. Stock Market Index § Stock index or stock market index is a method of measuring the value of a section of the stock market. § It is computed from the prices of selected stocks (typically a weighted average). § Thus, it is a statistical measure of change in a securities market.

V. Economy Reaction § financial markets play an important role in contributing to the health and efficiency of an economy. § There is a strong positive relationship between financial market development and economic growth. § Financial markets help to efficiently direct the flow of savings and investment in the economy in ways that facilitate the accumulation of capital and the production of goods and services.